How Much Is Enough?

There are few easy answers when it comes to life insurance.

By William J. Lynott

Do you need life insurance?

The answer to that question depends on your personal and business situation. If you have a spouse, children, or anyone who depends directly on you for financial support, you should of course have life insurance. If there is no such person in your life, you shouldn’t bother reading any further— life insurance would be a waste of money.

That’s the short answer.

The more complex question is what kind of insurance is best for you if you do need it, and if so exactly how much insurance should you buy.

Whole life insurance is often promoted as a form of forced savings, and the policy’s cash value is touted as a handy source for a loan if you should ever need one. In my view, you’d do better to join a Christmas Club at your local savings and loan.

The cash value in a whole life policy can take years to build up to any meaningful value. Further, if you take out a loan against it, your death benefit will be reduced proportionately as a result.

I know this sort of talk won’t make me any friends in the insurance industry, but that’s the way it is.

In a way, whole life insurance policies remind me of the toaster oven my wife—for some unfathomable reason—seems to love. To me, that devilish device is neither a toaster nor an oven. It’s slow and inefficient in both departments. Much like the fabled jack-of-all-trades, it is clearly a master of none.

The astonishing complexity that permeates the life insurance industry makes it virtually impossible to do justice to its entire sweep in a single column . . . or an entire book. In order for you to learn all you really should know about how to buy insurance you would have to retreat to the mountaintop, take up residence in a monk’s cell, and study for perhaps a year.

Absent that kind of dedication, here are some of the most basic highlights.

What kind should I buy?

Life insurance comes in two basic flavors: whole life and term life. In turn, whole life comes in three varieties: namely traditional, universal, and variable.

For the most part, I believe you should avoid any attempt of someone selling you a whole life insurance policy in any of its varieties.

As an investment vehicle, whole life insurance is a mediocre choice at best and downright lousy at worst. It is subject to the ravages of inflation and will not bring you the returns you can find in most any other form of conventional investment. In short, don’t buy into the idea that whole life insurance is a viable investment.

In the interest of full disclosure, there are some advantages to whole life. For one, the payments remain the same throughout your life, as compared to term insurance where annual rates go up as you age. In the long run, however, term insurance is a more cost-effective way to buy coverage.

Don’t expect your insurance agent to agree with this. He may even disparage term insurance as a “cheap” substitute for “real” life insurance. Some agents may attempt to frighten prospects with stories about skyrocketing term insurance payments as the policyholder ages. Don’t listen to any of these arguments. Your insurance agent will make more money if she sells you whole life insurance instead of term. That’s the simple fact.

The most important issue when deciding on the amount of life insurance to buy is why you are buying it. It is for the sole purpose of providing financial relief for those of your survivors who depend on you for their support.

You, in turn, will make more money if you decide to buy term insurance and invest the money you save while you are making those small payments required in the early years of term insurance.

For basic death benefit protection, go out and buy yourself a simple term life insurance policy. In most cases, you’ll save a lot of money and you’ll have a simple policy that’s easy to understand.

Shopping for whole life insurance can be incredibly quite complicated; term insurance is relatively simple to buy.

Your term policy won’t be encumbered with any complicated “cash surrender value” provisions, and you’ll have a dependable death benefit in the exact face amount shown on the policy. Just make sure there is a guaranteed renewable clause in the policy and you are protected against cancellation. That’s as simple as it can get, and that’s the way you should buy life insurance.

An independent agent can be invaluable in helping you shop around for the best policy and the best insurance company for your needs. Still, like the card player who trusts everyone in the game but wants to cut the cards anyway, you should shop around a little on your own.

SelectQuote offers one way to shop around. They have a database of many major companies that sell low-load and agent-sold policies. You can get instant quotes and apply for a policy from its website (www.selectquote.com) free of charge and call (855) 487-5009 to get as much advice as you want.

How much is enough?

The most important issue when deciding on the amount of life insurance to buy is why you are buying it. Life insurance on your life obviously provides no benefit to you. It is for the sole purpose of providing financial relief for those of your survivors who depend on you for their support.

The number of people and how much help they will need are the defining factors that determine how much insurance you should have.

If you are single and have no one depending on you, you don’t need life insurance—unless you want to buy a small policy to keep a family member from being stuck with your funeral expenses. On the other hand, if you have a wife and six children, they will suffer financially if you die and leave them without adequate coverage on your life.

The need for coverage decreases sharply for most people as they grow older. Once your children have grown and you have accumulated a sizeable estate, you may find you need no life insurance at all.

Obviously, then, variations on this theme are almost infinite. That’s why no simple table or rule of thumb can be depended on to tell you how much insurance to buy. You should consult with your insurance agent, an accountant, and trusted family members in making this important decision.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.

Bill Lynott is a management consultant, author, and lecturer who writes on business and financial topics for a number of publications. His book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach him at wlynott@cs.com or through his website: www.blynott.com.